As Britain gears up for another election, executives in the City of London are cautiously optimistic about the potential for a new government to bring stability and attention to the financial sector. This hope comes amidst years of political uncertainty that have taken a toll on the industry.
Financial Sector Outlook
Business leaders in London’s financial community are surprisingly calm about the upcoming July 4 vote, despite the likelihood of the Labour Party gaining power for the first time in over 14 years, ending the Conservative Party’s long rule. The sector had faced challenges under former Conservative Prime Minister Boris Johnson, who was dismissive of the financial community’s concerns about Brexit.
Although relations between the financial sector and the government have improved, Brexit, political instability, and economic uncertainty have significantly impacted an industry that contributes around 12% of the UK’s tax revenue. The chaotic “mini-budget” in September 2022 under Liz Truss, Sunak’s Conservative predecessor, which caused government bond yields to spike, remains a fresh memory.
Investment and Market Conditions
Despite the challenges, the UK remains a major destination for investment in finance. However, foreign investment in financial and professional services halved last year, and the London stock market struggles to attract new listings. “It’s encouraging that the significant value of the City to the UK economy is recognized on a cross-party basis, emphasizing the need to maintain the UK’s status as a world-leading capital market,” said Matthew Ponsonby, UK head of global banking at BNP Paribas.
Finance industry leaders hope a new government will prioritize reforms to boost the City’s competitiveness and attract global interest. They are particularly interested in unlocking pension funds for long-term investments. Ponsonby noted that “whoever wins in July must continue with constructive reform,” highlighting issues such as the stamp duty on UK equity trades.
Labour Party Engagement
Opposition leader Keir Starmer, leading in the polls, has appointed advisors sympathetic to the industry’s goals. Labour has actively engaged with the City, referring to it as Britain’s “crown jewels,” and has established regular dialogues with banks and investors regarding the Conservative government’s proposed reforms to enhance the sector’s competitiveness post-Brexit.
While Labour’s strategy for the City incorporates some government reforms, significant changes could still emerge as the campaign progresses. A Labour government would face similar fiscal constraints as the current administration and would need private investment to meet targets for housing and energy transition.
Industry Insights
Amanda Blanc, CEO of Aviva, emphasized the importance of recognizing the financial sector’s critical role in the economy. “We have a vested interest in the UK’s future success and long-term investment,” she said. A primary goal for the financial sector is enabling British institutional investors to direct more funds into domestic infrastructure and enterprise.
Aviva has advocated for reforms to dismantle the EU’s Solvency II rules, which have hindered UK insurers’ investments in infrastructure. The company has invested £9.5 billion in UK infrastructure over the past four years but sees this as just the beginning.
Nicholas Lyons, chair of British insurer Phoenix and former Lord Mayor of the City of London, highlighted the need to channel pension sector funds into infrastructure projects. “It’s crucial to enable financial services companies to take on risk,” he noted.
Investor Sentiment
British banks and investors are generally unconcerned about a potential change in government, with initial fears of windfall taxes not gaining traction. A new finance minister will also inherit plans to raise billions from selling taxpayer-owned shares in NatWest.
Chris Weston, head of research at financial services group Pepperstone, remarked, “The early commentary from Labour suggests limited risk of a major industry shock. Any announced taxes and surcharges appear manageable.” The relative stability of UK banks in Q2, despite Labour’s lead in the polls, indicates minimal investor concerns about the election outcome.
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